When selling a business, it is important to understand that any serious prospective buyer will want to do their due diligence and collect as much information about the business as possible to help them make an informed decision. While the initial attraction to the business may be based on a number of different factors, the buyer will be looking for clear proof that the business is profitable and that sales are trending in the right direction.
One of the critical steps in preparing to sell a business is to pull your financial statements for the last 2 or 3 years. Having these ready will help determine the value of the business, which is the first step in preparing it for sale. Ideally, a business owner should be meticulous about their bookkeeping and maintain thorough financial records throughout the life of the business. Maintaining this documentation regularly makes it easy to pull financial statements at any time, if needed, rather than scramble to produce them or have to back-date records. It is also a good idea to keep solid books because it helps you to run your business with more financial efficiency, and will save you money in the long run, by knowing exactly how every dollar enters and leaves the business.
Get the assistance of a CPA or another professional 3rd party to manage your financials. This helps to ensure the integrity of your books. Buyers also tend to trust financial statements more if they are prepared by someone outside of the company, and professionally maintained books could offer you the potential to increase your asking price. In addition, whether you end up selling your business or not, a professional accountant can help you to find ways to save money or cut out unnecessary costs. This can help you to improve the value of your company right away.
At some point during business sale negotiations, buyers are likely to request confidential documents such as customer lists or supplier contracts. It is understandable to be reluctant to hand over any sensitive documents such as these, especially early on in the process. Explain to the buyer your reluctance, but also understand that they are making a big decision on an investment, and just want to make sure they have all of the necessary information available to help them make that decision. This is also a good reason to have the buyer sign a Non-Disclosure Agreement and to consult with someone who is experienced in business sales, such as a Business Broker. Brokers can help by screening prospective buyers, so that you minimize the risk of handing confidential information over to the wrong person, like a competitor. Their experience with confidential sales can also help protect your privacy and sensitive documents.
Whether you decide to hire a Business Broker or sell your business on your own, the list of financial and potentially confidential documentation you will need to prepare for the sale of your business includes the following:
- Summary and overview of the business as well as a detailed business profile
- Profit & loss statements for the past 3 years
- Cash flow statement and balance sheet
- Business tax returns for the past 3 years
- If you are renting the space your business operates in, a copy of your lease agreement (which will also require special attention)
- Employment agreements
- Supplier and/or distributor agreements
- Any other pertinent financial documentation that proves profitability of the business
In addition to this list, several other documents may need to be furnished during the process of listing and selling your business. Many of them may be specific to your business or industry. A Business Broker can help advise you on what is needed, and what can add value to the business, as they know what buyers are looking for and have the experience to know what can increase the market value of your business. Good record keeping will help you to be prepared for the day you decide to sell your business, but in the meantime, it will add value to it, and provide you will some insight into the company. Being prepared and able to pull business documents on demand will also reflect well on you and your business and impress buyers. After all, they are not only looking for a profitable business, but one that is well run and organized.
If you are considering selling a business in the near future, or even further down the road, it is good to have a grasp on what you need to be ready to sell and how much your business is worth. CIBB has experience helping business owners to sell companies of all different sizes from every industry, profitably and confidentially. Call us to get the process started with a free, no-obligation business valuation.